Gains in financials hinge on RBI policy, investors must consider options

Nifty Bank outperforming the Nifty50 in recent times could be a sign of things to come

The banking sector and non-banking financials are both in an interesting space. On the one hand, the Reserve Bank of India (RBI) tightening the monetary policy and hiking interest rates are negative developments. But, if the economic recovery continues to have strong momentum, then credit expansion should take place anyway and non-performing assets (NPA) aggregation and credit slippages could be balanced by stronger corporate performance.

It is worth noting that the real interest rates are still negative, despite the policy rate hikes in May and June. Inflation is still running higher than the policy rates and also higher than the yields